Canada’s Credit Problem Is Different This Time, Just Look At The Money Supply

Worried that Canadians didn’t get another interest rate hike yesterday? Don’t be. Bank of Canada (BoC) numbers show the M1+, a broad measure of “cash,” continues to see tapering growth. That might not mean a lot to most people, but it may be signalling that households are still feeling the impact of the previous interest rate hikes. It sounds complicated, but we’ll explain it with as little technical language as possible.

The M1+ Is An Important Measure of Money

The M1+ is one of the measurements of monetary aggregates, this one being the most liquid form of money. The BoC counts the currency outside of banks, plus chequable deposits held at chartered banks, trust and mortgage loan companies, and credit unions. Basically, it’s the most readily available forms of cash. The extremely important indicator is rarely discussed outside of the BoC.

This measure is essential to the BoC for managing the rate of money growth “indirectly.” When interest rates increase, people borrow less and use more money to service debt. The result is less “cash” floating around, which is reflected in the growth of M1+. Slowing growth is almost always a sign of declining economic growth. The impact is more immediate in industries that use large amounts of financing, like home or car sales. Starting to see why the Consumer Price Index (CPI) isn’t the only reason the BoC moves interest rates? Great, let’s see how slow the growth is these days.

Lowest Growth Since December 2003

The growth of M1+ continues to rapidly taper, according to the BoC. The rate of growth fell to 5.6% in April, the lowest it’s been since December 2003. For a little context, that growth is 49.09% lower than the same month last year, when it was 11%. Since November 2017, we’ve fallen below the median rate of 7.85%. This is still an expansion of the supply, but way slower than we’ve seen in recent history.

Canadian M1+

Percent change in M1+, showing declining economic activity.

Source: Bank of Canada, Better Dwelling.

If you’re wondering why the BoC didn’t hike interest rates yesterday, it’s because they didn’t need to. Households are still adjusting to the previous hikes, even though we’re just off record low interest rates. Despite relatively low debt service levels the government claims, we’re seeing a small hike remove a lot of growth of M1+. Less cash is floating around, as households devote more money to servicing their existing debt.

The rising cost of debt servicing will be a drag on economic growth. As we can see, there’s little urgency to drag economic growth even further. We’re already seeing it happen, we just need to sit back and wait for the government to announce it.





  • Bluetheimpala 2 years ago

    Tick tock. BD4L.

  • Trader Jim 2 years ago

    Good catch. The drop as a result of the hike is also a similar sized decline to the 2010 decline that was the Great Recession. Typically that happens after a downturn, not before. This decline lining up with the interest rate hike shows the size of the debt these people are carrying.

    Another good point worth remembering, is that M1+ would capture cash from the informal economy as well. Cash deposits from being paid from undeclared income, etc.. Even better is this is also a very rough indicator of cash disappearing to service private loans, that wouldn’t be on the government’s books.

    The decline *could* be the result of increased consumer spending, but I doubt it considering it closely aligns with the rate hike. Retailers aren’t demonstrating a boom from anything I can see.

  • Ian 2 years ago

    I might be a dummy, but I’m going to need more hand holding on this explanation. It sounds bad, but I have no idea tbh.

    • Spectator101 2 years ago

      you and me both.

      • Sam 2 years ago

        The way I understand it, the less cash floating around means people spend less which means the good economic run (GDP growth, low unemployment, etc.) is going to come to an end.

        • Bluetheimpala 2 years ago

          That is a good way of thinking about it Sam. If your$ goes to pay down debt, people consume less in the broader economy and there is no/limited trickle down. The money doesn’t multiple and just stays. I compare it to buying weed off a buddy. When I was buying $5 a week he was always eating out, buying drinks and generally happy. As my debt servicing increased I was only able to buy $2 of marijuana; my friend doesn’t go out very much and isn’t so happy. On a side: some have argued that $1 of debt repayment is worth essentially zero as NO innovation/hiring/productivity extends outside of the 0.001% of the population. We are literally just burning money. And you are correct, there will be an impact to the broader economy as it plays out. Tick tock.

      • @xelan_gta 2 years ago

        Spectator101 and Ian, I’ll put it very simple for you.
        Ave. price of the house in Canada is defined as: All money spent on houses divided by all houses.
        This article clearly shows that “All money” component is declining which should result in lower average price sooner or later.

        Residential mortgage credit (which is included in M1+) is the fuel or Real Estate market. And we are running out of it.

    • Bluetheimpala 2 years ago

      Yeah, I understand it only conceptually; this ain’t my day job and I’m also not intellectually inclined. Essentially it is a gauge for how much CASH is in the system. A few things: you need to understand that we’re a consumer based economy as all developed countries end up this way; that’s what china is struggling with at the moment. Ipso facto how consumers/plebes spend their money is important. Also wages/labour eats up the biggest % of the cost of products/services generally. Sooo…When you repay debt the money goes into the ether (back to BoC and debt holders, bank industry profits, banker bonuses, dividends for the wealthy). One pocket/wallet more or less. Very narrow trickle down within the broader economy as most people do not work in banking; basically dead money from a GDP perspective. When money goes into the broader economy the dollars spent trickle down. A bit gets put into a number of pockets/wallets vs just one, the banks. I buy a coffee, some of it goes to the employee the suppliers of the product. I’ve seen it referred to as the cash liquidity. If I have $10 and before $3 was debt and I was spending $7 as discretionary then that money goes back into the economy. Employees buy a slice of pizza and the cycle continues. A dollar of money spent on discretionary results in >$1 of money working through the economy. Now this has flipped for many and they only have $3 for spending. Suddenly the trickle down is choked off and those later in the chain have less. M1+, while I don’t admit to understanding it, is something that I always take not of if something note worthy happens. It doesn’t have a sexy name, is complex and is rarely discussed but is probably one of the most important elements in understanding an impending. Oh and while we’re in the early stages, the fallout is generally a recessionary environment as employees in the broader economy have to scale back since all the $$ is going to the banks. Takes time. Tick tock. BD4L.

      • Joe 2 years ago

        Yep, and all your high end coffee shops, gourmet markets, boutiques, personal trainers, upscale retail joints, even dentists, start to feel the heat. Anything that can be viewed as “optional” or “excessive”, will see a drop in revenue, as people go from gourmet coffee, to starbucks, to timmies, to “i will just brew it at home”. Another sign that a recession is a coming. A lot of store fronts in newly developed properties are going to shutter. Recession mid 2019, here we come.

  • @xelan_gta 2 years ago

    First warning for condo sector: “Has Toronto hit peak condo?” article from The Globe And Mail.

    Subscription is required to access content, but keep monitoring the news, I’m sure more of those articles will start to pop up within the next month.

    • Joe 2 years ago

      “It’s tough for the agents – it’s tough for the sellers.”

      Good… it’s going to only get worse for them

  • Grizzly Gus 2 years ago

    According to Zolo Toronto Market Stats

    Average price for may has just dipped below april. Last year May was down MOM from April but we had fair housing plan. I believed we would see MOM increases until June, then MOM declines till september. Maybe YOY gains throughout the summer months. Pottential for a small bull trap in the fall

    If May actually is down MOM from April then I think this will really mark the start of where things get really ugly…………. It might actually be here……… Kind of scared now

    • @xelan_gta 2 years ago

      I’m monitoring those Zolo graphs very closely too.
      Ave. price definitely started declining now. The big question is how strong this decline will be.
      I still think we have some time (could be even year or more) due to low inventories but I’m also expecting new regulation this year.
      Something targeted at condo sector and risky mechanisms used there like borrowing down payments from HELOCs etc. Assignments could be targeted as well.
      If that will happen, no doubt confidence will be shaken and some speculators will try to cash out their big gains. First ones will get the biggest profits obviously and those who are late may not get anything at all.
      Inventory will catch up pretty quickly in this case and we’ll be all set for a full correction.

      • Bluetheimpala 2 years ago

        Low inventory narrative is sell fulfilling in the early stages and something the RE industry is clinging onto…people are waiting because they think prices will come back up but do not understand what created the bubble in the first place. I’ve been watching a property in Halton that is 120+ DOM and the seller hasn’t reduced the price; i reached out to the agent and he won’t even respond…he knows the house is $200K too high but he told me months ago his sellers are old and stubborn. Unless wages double or BoC cuts rates in half tomorrow there will be no reprieve. We’re in a demographic era where people with built up equity need to realize those gains. Sure you can cover your eye and ears and hope prices come up or you can sell sooner and make more as prices are not coming back around for 10+ years, maybe 15+. People need to sell. Prices are coming down. Tick tock.

    • Bluetheimpala 2 years ago

      Up 0.4% but I’m not sure how this is massaged it is but it looks like it is condos that is keeping everything up. More importantly the YoY has flipped, down 1.9% as the negative r^2kept driving it down. No one will read this but to the RE bulls who 3 months ago were still touting the YoY increase despite the r^2 being negative and also accelerating down…economics fundamentals. Tick tock.

  • Justin Thyme 2 years ago

    Methinks I have read this before. Re-cycling past articles?

    M1+ is an ancient, out-dated, useless statistic.

    ‘Free’ and ‘available’ money is moving out of chequable accounts (no interest) and into TFSA’s, short-term GIC’s. and other ‘locked in’ products., none of which are included in M1+.

    So the more money that consumers move from non-interest accounts into all of the accounts that banks are now pushing, that deliver higher interest rates, gives the illusion of a shrinking money supply. Without looking at these products, nothing can be said about the available money supply.

    In fact, earning 3% on a short-term GIC is actually INCREASING your money supply by 3%, while keeping it in a checking account at 0% ain’t puting ANY new money in your pocket.

    Really, when you first started, you actually put some thought and research into your articles. Now, ho-hum.

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